* HSI up 0.4 percent, China shares flat
* Turnover light as G7 emergency talks prompt short-covering
* HK property offers good risk-reward: Bofa Merrill Lynch
* China Coal closes at over 3-year low, Yanzhou down 3.3 pct (Updates to close)
By Vikram Subhedar
HONG KONG, June 5 (Reuters) - Battered Hong Kong shares rose slightly on Tuesday, partly on short-covering ahead of emergency G7 talks on the euro zone debt crisis, although investors remained reluctant to take on fresh positions because of the increasingly gloomy global outlook.
The Hang Seng Index ended the day up 0.4 percent, with beaten down financials supporting gains although turnover on the exchange slumped nearly a third from the past month’s average, pointing to investor caution.
Mainland markets, which have outperformed Hong Kong and other regional stock indices since last month’s weakness, were little changed. The Shanghai Composite closed up 0.2 percent while the large-cap focused CSI300 ended flat.
“With the G7 ministers & central bankers due to talk today some investors are covering. I just don’t see anything too dramatic,” said a Hong Kong-based trader at an American brokerage.
Spain, the euro zone’s fourth-largest economy, is quickly becoming the biggest concern for investors as the region’s debt woes threaten to spread.
Finance chiefs of the Group of Seven leading industrialised powers will hold emergency talks on the euro zone debt crisis in a sign of heightened global alarm about the threat posed by strains inside the 17-nation monetary union.
Investors took refuge in some of this year’s outperformers such as insurer AIA Group which is among a handful of blue chips that has remained in positive territory for the year. Its 2.2 percent gain on the day brought its year-to-date returns to 3.7 percent.
Shares of Bank of China, the top performer amongst the Big 4 Chinese banks this year, rose 1.4 percent.
Hong Kong property shares were broadly stronger after Bank of American Merrill Lynch said in a note to clients rewards outweigh the risks of buying into the sector at current levels.
The brokerage now projects Hong Kong residential prices to rise 5 to 10 percent in 2012 versus a prior forecast that called for a 10 percent decline largely due to the resilient performance of homes prices year-to-date.
Analysts at BofA Merrill Lynch said the valuation gap between physical property prices and stocks was at an all-time high and the markets were pricing in a 30 percent drop in physical prices.
Cheung Kong Holdings, up 0.2 percent, and Henderson Land, which ended up 0.3 percent, were among its top picks.
Shares of Wharf Holdings, which owns commercial properties throughout Hong Kong, rose 1.5 percent after the company agreed with the Hong Kong government on terms to renew a land lease.
Bucking the trend, cyclical stocks such as coal producers and shipping stocks remained weak as the outlook on global growth remains grim.
China Shenhua fell 1.7 percent while China Coal lost 1.5 percent to close at an over three-year low.
Yanzhou Coal fell 3.3 percent to its lowest since October 2009.
Rising inventory levels at power plants and ports will weigh on thermal coal prices while a weak outlook for steel and coke prices will limit coking coal prices, according to analysts at Goldman Sachs who maintain their cautious view on the sector.
Editing by Jacqueline Wong